Outline of chapter

1.1
The Bill implements the Government’s response to
Recommendation 2.4 of the Final Report of the Royal Commission. The
Royal Commission recommended that the grandfathering arrangements
for conflicted remuneration in relation to financial advice
provided to retail clients should be removed as soon as is
reasonably practicable.

1.2
The Bill removes these grandfathering arrangements for conflicted
remuneration and other banned remuneration from 1 January 2021. The
Bill also enables the regulations to provide for a scheme under
which amounts that would otherwise have been paid as conflicted
remuneration are rebated to affected customers.

Context of amendments

1.3
The Act includes provisions that ban conflicted remuneration and
certain other remuneration in relation to financial advice provided
to retail clients. These provisions aim to more closely align the
interests of those who provide financial product advice with the
interests of their retail clients. In particular:

â¢
Division 4 of Part 7.7A of the Act bans the payment and receipt of
benefits which have the potential to influence financial advice
provided to retail clients about financial products;

â¢
Division 5 of Part 7.7A of the Act bans platform operators from
accepting volume-based shelf-space fees; and

â¢
Division 5 of Part 7.7A of the Act bans financial services
licensees and authorised representatives of financial services
licensees from charging asset-based fees to retail clients in
relation to borrowed amounts.

1.4
These Divisions generally apply to benefits given or, with respect
to asset-based fees on borrowed amounts, fees charged from
1 July 2013. [1]
However, there are currently exemptions to these Divisions for
‘grandfathered arrangements’. Under the grandfathering
provisions:

â¢
the bans on accepting and giving conflicted remuneration do not
apply to benefits paid under arrangements entered into before 1
July 2013 except with respect to benefits given by a platform
operator (see section 1528 of the Act);

â¢
the ban on charging volume-based shelf space fees does not apply to
benefits given under arrangements entered into before 1 July 2013
(see section 1529 of the Act); and

â¢
the ban on charging asset-based fees to retail clients on borrowed
amounts only applies to the extent that the borrowed amounts are
used or are to be used to acquire financial products on or after 1
July 2013 (see section 1531 of the Act).

1.5
On 1 February 2019, the Final Report of the Royal Commission
recommended that grandfathering provisions for conflicted
remuneration should be repealed as soon as is reasonably
practicable (Recommendation 2.4).

1.6
On 4 February 2019, in its response to the Royal Commission, the
Government announced that it would end the grandfathering of
conflicted remuneration to financial advisers effective from 1
January 2021 and mandate that previously grandfathered conflicted
remuneration be rebated to customers.

1.7
On 22 February 2019, the Government released an exposure draft bill
with this effect for public consultation. The draft bill also
provided for regulations to be made to provide for the pass through
to customers of the benefits of any previously grandfathered
conflicted remuneration remaining in contracts after 1 January
2021. Submissions were received from a number of stakeholders
including industry bodies and consumer groups.

1.8
On 28 March 2019, the Government released exposure draft
regulations for public consultation. These draft regulations also
provided details on how benefits must be rebated to customers and
details of record keeping obligations on persons required to pass
through benefits. The draft regulations also repealed a number of
other grandfathering arrangements which are contained in Part 7.7A
of the Corporations Regulations 2001 .

Summary of new law

1.9
The Bill removes grandfathering arrangements for conflicted
remuneration and other banned remuneration effective from 1 January
2021. This means that from 1 January 2021 all remuneration of a
kind banned by Divisions 4 or 5 of Part 7.7A of the Act will
be subject to the bans in those Divisions.

1.10
As part of ending grandfathering, the Government will also make
regulations prior to 1 January 2021 that will repeal a number of
other grandfathering arrangements which are contained in Part 7.7A
of the Corporations Regulations 2001 .

1.11
The Bill also enables regulations to provide for a scheme under
which amounts that would otherwise have been paid as conflicted
remuneration are rebated to affected customers.

Comparison of key features of
new law and current law

New law

Current law

Grandfathering arrangements for conflicted remuneration and
other banned remuneration in relation to financial advice to retail
clients are removed, effective from 1 January 2021.

Conflicted
remuneration and other banned remuneration may be paid if the
benefit is paid under a grandfathered arrangement entered into
before the application day specified in the Act (generally
1 July 2013).

Regulations may provide for a scheme under
which amounts that would otherwise have been paid as conflicted
remuneration are rebated to affected customers.

No
equivalent.

Detailed explanation of the new law

1.12
The Bill ends the grandfathering of arrangements for conflicted
remuneration and other banned remuneration in relation to financial
advice, effective from 1 January 2021. This means that from 1
January 2021 all remuneration of a kind banned by Divisions 4 or 5
of Part 7.7A of the Act will be subject to the bans in those
Divisions.

1.13
As part of ending grandfathering, the Government will also make
regulations prior to 1 January 2021 that will repeal a number of
other grandfathering arrangements which are contained in Part 7.7A
of the Corporations Regulations 2001 .

Removing grandfathering arrangements

1.14
The new law removes the grandfathering of conflicted remuneration
under Division 4 of Part 7.7A, effective from
1 January 2021. [Schedule 1, item 1, subsections 1528(1) and (1A)
of the Act]

1.15
The new law repeals existing subsection 1528(3) of the Act.
Subsection 1528(3) of the Act currently provides that Division
4 of Part 7.7A does not apply to a benefit to the extent that
the operation of the Division would result in an acquisition of
property (within the meaning of paragraph 51(xxxi) of the
Constitution) from a person otherwise than on just terms (within
the meaning of paragraph 51(xxxi) of the Constitution).
[Schedule 1, item 2, subsection
1528(3) of the Act]

1.16
The new law provides that section 1350 of the Act does not
apply in relation to the operation of Division 4 of Part 7.7A in
respect of a benefit given to a financial services licensee, or a
representative of a financial services licensee. Section 1350
of the Act provides for compensation to be payable where the
operation of the Act would result in an acquisition of property
(within the meaning of paragraph 51(xxxi) of the Constitution) from
a person otherwise than on just terms (within the meaning of
paragraph 51(xxxi) of the Constitution). [Schedule 1, item 2, subsection 1528(3) of the
Act].

1.17
The new law removes the grandfathering of volume-based shelf-space
fees, effective from 1 January 2021 .
[Schedule 1, item 3, subsections 1529(1) and (1A) of the
Act]

1.18
The new law provides that section 1350 of the Act does not apply in
relation to the operation of Subdivision A of Division 5 of
Part 7.7A of the Act in respect of a benefit given to a financial
services licensee, or an RSE licensee. [Schedule 1, item 4, subsection 1529(2A) of
the Act]

1.19
The new law repeals existing section 1530 of the Act.
Section 1530 currently provides that regulations made for the
purposes of subsections 1528(2) or 1529(2) of the Act do not apply
to a benefit to the extent that the operation of the Division would
result in an acquisition of property (within the meaning of
paragraph 51(xxxi) of the Constitution) from a person otherwise
than on just terms (within the meaning of paragraph 51(xxxi) of the
Constitution). [Schedule 1,
item 5, section 1530 of the Act]

1.20
The new law provides that section 1350 does not apply in relation
to regulations made for the purposes of subsection 1528(2) or
1529(2) of the Act. [Schedule
1, item 5, section 1530 of the Act]

1.21
The new law removes the grandfathering of asset-based fees charged to retail clients on
borrowed amounts, effective from 1 January 2021. [Schedule 1, items 6 and 7, subsections 1531(1) and (1A) of
the Act]

1.22
The new law also repeals existing subsection 1531(2) of the
Act. Subsection 1531(2) of the Act currently provides that
Subdivision B of Division 5 of Part 7.7A does not apply to a
benefit to the extent that the operation of the Division would
result in an acquisition of property (within the meaning of
paragraph 51(xxxi) of the Constitution) from a person otherwise
than on just terms (within the meaning of paragraph 51(xxxi) of the
Constitution). [Schedule 1,
item 7, subsection 1531(2) of the Act]

1.23
The new law also provides that section 1350 of the Act does
not apply in relation to the operation of Subdivision B of
Division 5 of Part 7.7A in respect of an asset-based fee.
[Schedule 1, item 7, subsection
1531(2) of the Act]

Rebating provisions for conflicted remuneration

1.24
The new law allows for the regulations to provide for a scheme
under which benefits that would otherwise have been paid as
conflicted remuneration after 1 January 2021, but for the
Bill, are rebated.

1.25
Under a scheme made in the regulations, the obligation to rebate
would apply to a person who is legally obliged (disregarding the
ban on conflicted remuneration in Subdivision C of Division 4 of
Part 7.7A of the Act) to give conflicted remuneration to another
person, on or after 1 January 2021. The regulations may exclude
people from this obligation or extend the obligation to more
people. [Schedule 1,
item 9, section 963M and subsection 963N(1) of the
Act]

1.26
A scheme under the regulations would provide for rebates to product
holders. Product holders is defined to include retail clients who
received, or were legally entitled to receive, financial product
advice in connection with the conflicted remuneration.

1.27
The definition of product holder also includes people who hold the
same financial products (or products in the same class) as those in
relation to which the conflicted financial product advice was
provided. [Schedule 1,
item 9, subsections 963N(2) and (3) of the
Act]

1.28
In circumstances where a financial product is held by a person on
behalf of another person, both people are product holders for the
purposes of the Bill. This is to ensure that the rebating scheme in
the regulations can facilitate the provision of the rebate to the
ultimate holder of the product. [Schedule 1, item 9, subsection 963N(3) of
the Act]

1.29
The amounts that are required to be rebated under the scheme are to
be based on the conflicted remuneration that would have been
payable but for the ban introduced under the Bill. The scheme may
provide for rebating to occur by means of making a payment or
providing a monetary benefit (for example, reducing a fee).
[Schedule 1, item 9,
section 963N of the Act]

1.30
This regulation making power is intended to be a broad power to
ensure that the rebating scheme can be effective for the variety of
situations in which conflicted remuneration is provided. To this
end, the new law provides that:

â¢
the regulations may make different provision in respect of:
different classes of persons that would otherwise have given
conflicted remuneration; different classes of financial product;
different classes of product holder; different classes of
conflicted remuneration; and different classes of circumstances in
which conflicted remuneration arises; and

â¢
the regulations may provide for: the identification of product
holders; the timeframe in which rebates must occur; a method or
methods of determining amounts of payments, or amounts of monetary
benefits; and, a method or methods of making payments or providing
monetary benefits.

1.31
These provisions are a non-exhaustive list of the matters that may
be dealt with by the regulations. Their inclusion in the new law is
not intended to limit the matters that may properly be dealt with
by the regulations. [Schedule
1, item 9, subsections 963N(4) and 963N(6) of the
Act]

1.32
In light of the broad definition of product holder, the new law
also provides that the regulations may provide that payments or
monetary benefits need not be provided to one or more specified
classes of product holder. [Schedule 1, item 9, subsection 963N(5) of the
Act]

1.33
The new law also provides for civil penalties if a person fails to
pay an amount or monetary benefit in accordance with the
regulations. New section 963P is a Part 7.7A civil penalty
provision. [Schedule 1, items 8
to 10, sections 9 and 963P and subsection 1317E(3) of the
Act]

Overview

2.2
The Bill implements a recommendation of the Final Report of the
Royal Commission that grandfathering provisions for conflicted
remuneration should be removed as soon as is reasonably
practicable.

2.3
It provides for the removal of grandfathering arrangements for
conflicted remuneration for financial advice, volume-based
shelf-space fees and asset-based fees on borrowed amounts,
effective from 1 January 2021.

2.4
It also provides for a scheme, to be made by regulations, under
which benefits amounting to conflicted remuneration that would
otherwise continue to be given after 1 January 2021 are
rebated to affected customers.

Human rights implications

2.5
The Bill does not engage any of the applicable rights and
freedoms.

Conclusion

[1]
The Act made provision for persons to elect to
comply with the obligations in Division 4 and Division 5 of
Part 7.7A from a date earlier than 1 July 2013 (a date between
1 July 2012 and 1 July 2013). Under the Act, these elections may
have the effect that the grandfathering provisions apply with
reference to that earlier date. For readability, this memorandum
refers to 1 July 2013 as the date in relation to which
the grandfathering provisions operate.